3 Warren Buffett Holdings to Sell Now

Investors as savvy as Warren Buffett don’t come around very often, and when he makes a move, people pay attention. Furthermore, when the market learns that Buffett has been buying or selling a stock that stock usually reacts depending upon Buffett’s move. But this by no means implies that he is infallible—just because Buffett is buying a stock, or just because he owns it doesn’t mean it is worth buying. In this article I point out three stocks that Buffett owns a lot of, but which I don’t believe are quality investments, at least at their current valuations.

First, however, I just want to remark that this doesn’t mean that investors shouldn’t follow Buffett at all. It’s just that rather than blindly following his actions the best approach is to look at what he is doing to get ideas. So, for instance, if he is buying Exxon Mobil (NYSE:XOM), he probably has a good reason for doing so, and as an investor, I recognize this and can incorporate it into my analysis of the stock. If I see what he does, then I will follow him in. But in the case of the three stocks I discuss in a moment, I don’t see any reason for owning them. While he has held a couple of them for many years, and while he has made money with them I think that they are ultimately poor investments at current valuations.

Proctor and Gamble has done an excellent job of creating long-term shareholder value. Unfortunately there are a couple problems with the company right now. The first is that it has not been growing its earnings in the past few years. In fact 2013 earnings are down from 2010. Meanwhile the company is trading near an all-time high at 22 times earnings. While I don’t think the stock is going to crash, I think investors are starved for yield, and they are turning to stocks such as Proctor and Gamble for dividends and perceived safety. But if the market corrects and stocks such as Proctor and Gamble trade at lower price to earnings multiples (remember that 14 times earnings is historically “normal”) then the shares have significant downside risk.

This is an even bigger holding for Buffett via Berkshire Hathaway (NYSE:BRK.B). It also suffers from the same problems that Proctor and Gamble is having. The stock has been bid up because it is viewed as a bond-proxy, and for some reason investors don’t seem to mind paying 22 times earnings for a company that isn’t growing its earnings because of perceived safety. Also, while the Coca Cola brand is an excellent one we have to keep in mind that the company’s sales come largely from other products.

Even if I’m wrong about the relative weakness of the company’s other brands safety is largely priced in, and it is hard to see where the upside is going to come from. Meanwhile PepsiCo (NYSE:PEP) is less expensive on a price to earnings basis, and it has been growing over the past few years. To me this seems to be the better choice if you want to own something in the non-alcoholic beverage space.

IBM is Buffett’s new darling, but I really don’t see why. The company has a lot of exposure to the computer hardware space, and prices are coming down rapidly because there is a very low barrier to entry. Furthermore the company has been spending a lot of money buying back its own shares rather than growing its business. While the company boasts exposure to the cloud and to software services it is not showing the growth that its peers in this space have generated. This has led to declining sales year after year.

For a while, this didn’t matter. The company cut costs to grow profits, and it bought back stock to grow earnings per share. But in the most recent quarter IBM’s weakness was revealed when it reported a decline in earnings per share year over year. It doesn’t seem as if the company will meet its long-stated goal of earning $20/share by 2015, and as a result, I think the shares should be sold even at 12 times earnings.